Price Cuts Hit Record as Inventory Floods Back

Dave:
New data is in from Zillow, and it’s giving us a clearer picture of where the housing market is headed. I’m Dave Meyer, and today I’m joined again by Orfe dga, senior Economist at Zillow to give us a sneak peek into their unreleased housing market update. We’re gonna talk about shifting inventory, changing buying behavior, and what Zillow’s latest forecast says about home values and mortgage rates for the rest of 2025. Whether you’re buying, selling, or investing, this is a must hear for those wondering where the market may head next. Let’s get into it. Orfe, welcome back to On the Market. Thanks for being here.

Orphe:
Uh, it’s my pleasure. It’s one of my favorite shows, you know?

Dave:
Thank you. Well, we appreciate you being here. You’re, you’ve become a friend of the show. You’re here often. Tell us what’s, what’s been going on since we last seen you. It’s been a very exciting time in the housing market, to say the least. Tell me just what’s on the top of your mind, what do you think are the most important developments real estate investors and people in the housing industry should be thinking about these days?

Orphe:
Well, the fact that inventory is rising again.

Dave:
Yeah.

Orphe:
You know, the total number of homes for sale was so low during the pandemic, and now we’re actually seeing some markets have more inventory than we’ve had before. The pandemic nationwide, the deficit in, in inventory compared to before the pandemic is the smallest it’s been in a long time. I think we’re looking at more inventory on the market than any time since August, 2020.

Dave:
Yeah.

Orphe:
And so I think that’s good news. That’s good news because, you know, historically more inventories linked to more buyers, more sales, a healthier housing market, uh, a more liquid housing market. And so this is good news.

Dave:
Yeah, I, I, I totally agree. I think people have this diverging opinions about it. It’s in some ways everyone decries the unaffordable housing market we’re in, which makes sense. But then if prices start to go down or flatten up, or I inventory starts to go up, they get all nervous. , there’s like, no, there’s like no sweet spot for a lot of folks here, but I, I am with you. I think we have been in this unhealthy housing market that is too strongly tilted towards sellers for a really long time. And That’s right. Obviously don’t want the pendulum to swing all the way back in the other direction, but just seeing more inventory as an investor and someone who cares about the housing industry, I think it’s really important that we’re moving in this direction.

Orphe:
It’s a bad balance, right? It’s a bad balance. We want a more balanced housing market. The gap between buyers and sellers was so wide for so long, and I, and I’ve said it time and time again to a few people, it’s, look, your first time home buyers are essentially renters who saw their rents increase way faster than their wages, than their incomes. And so the renters are strapped for cash. And by the way, mortgage rates increase as well. They’re facing the worst affordability conditions. And then at the same time, you had this, these sellers, well, homeowners who saw the value of their homes increase so much, they’re sitting on near record home equity. Right. You know, in some markets you’ve seen some price drops still. You see, you know, you’re 40, 45% higher than you were before the pandemic. You’ve accumulated so much home equity, you were able to refinance your monthly payments at a low cost.
So you’re, you are comfortable. And so there’s a big gap between would be buyers today and sellers. And the good news is the gap is shrinking as more and more sellers return inventory rises. You know, those sellers are out there, are realizing that maybe, you know, it’s kind of tough for buyers. And so the question is, okay, like I hear people say all the time, is that such, is that a bad thing? And I say, no, it’s not . You know, the, the pendulum was so far tilted in favor sellers. And I also say, look, price cuts, sell homes. Look at builders. Right? Why are we seeing sales, new construction sales increasing so fast across the country and continue to increase? Because builders have realized that, well, they can make a few adjustments, cut prices here and there, provide a few incentives, and they’ll continue to sell homes.

Dave:
Mm-hmm .

Orphe:
And so existing homeowners are starting to steal a page from builders. And I think that’s a good thing.

Dave:
Yeah. I personally, I’m tired of sellers just being able to name basically whatever price that they want and people would go pay it. And I think even if the house or the property that you’re looking at doesn’t have a price cut, to me it sort of is this psychological thing too that sort of empowers buyers, generally speaking, to be a little bit more patient, to be a little bit more discerning, perhaps be a little bit more firm in their negotiations. And that will get us back to sort of this healthier place. I personally am encouraged by it for the first time in, I don’t even know, years. I drove around on Sunday and I went to open houses. Like there just haven’t been open houses. There’s not one for so long. And I was like, there’s like five in my neighborhood, I just want to go check ’em out. And I had a great day, , but I, I think that’s a sign of good things. So I’ve been tracking some of the deals I was looking at, and some sold for 150 grand over list price. It’s not like prices are in free fall, it’s just this pricing exercise seems to have gotten a little bit harder, or sellers are being a little bit too aggressive. And this doesn’t even necessarily even mean median home prices are down. They’re not in a lot of markets. It just means the expectation of sellers and buyers are have really shifted.

Orphe:
That’s right. And there weren’t a lot of comps, right? Like, think about it. If you don’t have a lot of inventory on the market, what are you, what are you comparing to? Mm-hmm

Dave:
.

Orphe:
By the way, I was personally, I was just in the market. I bought a house in Wake Forest, North Carolina, and it was crazy because like there wasn’t any inventory. So what do you compare it to? . , right. Of course you gotze you got this estimate, right? You always got this estimate, you know? Yeah. So you could always go on Zillow and see what’s what’s out there. But yeah, ultimately it was like, okay, the appraisal came in and I was looking at like, what did they compare this home to , right?

Dave:
Yeah. Well, congrats that, that’s super cool.

Orphe:
Thank you.

Dave:
So I, I think with this whole rising inventory question, I think we’re close to a good spot right now, you know, in, in terms of the balance between supply and demand. But the question is sort of, does it keep going? And obviously no one knows, but I know Zillow’s put out, you and your team have put out a lot of research and forecast that you think home prices on a national level or likely to turn negative. So is that a reflection of your belief that inventories will continue to rise this year?

Orphe:
A couple things, right? So yes, we believe inventory will continue to rise, partly because the flow of sellers coming back will somewhat outpace home sales, right? By the way, we expect home sales to increase, right? We’ve expect prices to decline slightly, but we still expect home sales to end the year slightly higher than they did last year, right? And I, and I said it time and time again, right? Price cuts, sell homes, you’re gonna have adjustments on the price side, little bit more inventory bargaining power is gonna improve a little bit for buyers over the course of the year, but ultimately you should have more transactions because essentially the housing market is getting healthier.

Dave:
Mm-hmm

Orphe:
. Right? Um, and that’s good. I think that’s positive. Now of course we just, I just looked at our April data and our April data shows sellers are still coming back. Buyers are still coming back. But it’s mostly the normal seasonality stuff, right? Mm-hmm . The one thing that was interesting though is that the rise in policy uncertainty in April, right? Remember April was like, whoa, we’re gonna have some trade wars. We’re gonna, right? And the stock market dive right in April, kind of put a little bit of a pause on activity. What I mean by pause is basically the increase in activity was a little bit lower than what you would typically see in an April

Dave:
Mm-hmm .

Orphe:
Right? And, and that was really the policy uncertainty effect, right? When people worry about the future, they worry about their future incomes. They see the value of their 4 0 1 ks declining ’cause the stock market is down, right?

Dave:
Mm-hmm .

Orphe:
They tend to pause, right? It doesn’t mean that it’s a moment to be concerned. It’s just a slight bump on the road. In fact, policy and certainty has declined since then. There’s a, there’s actually a policy uncertainty index, so you can actually check out the stuff.

Dave:
Is it really? Yeah, there is course the data nerd in me loves that. What is that called? ?

Orphe:
Yeah, it’s called the, it’s called the economic Policy Uncertainty index.

Dave:
I did not know.

Orphe:
Yeah. And you can actually see that, that the decline in policy uncertainty actually bodes well right? For, uh, housing market activity. Uh, the fact that mortgage rates are still 20 to 25 basis points lower than they were this time last year is also a tailwind for housing market activity.

Dave:
Huh.

Orphe:
In 2025,

Dave:
I was actually even surprised when you look at the Mortgage Bankers Association keeps their mortgage purchase index, and that’s still up year over year. And, you know, it doesn’t feel like that if you listen to the news, but more people are applying for mortgages. That’s, and even though inventory is rising, just so everyone knows, both things can be true. Demand can be up and inventory can go up as long as supply or new listings is growing faster than the pace of demand. And so that’s essentially what we’re seeing. So it’s not like people are fleeing the housing market right now. More people are trying to buy in 2025 than at the same period in 2024. Likely, as Orfe said, mortgage rates have come down a little bit. So I, I think it’s important not just to see that inventory is rising, but why inventory is rising is a really important element here, still ahead, what Zillow sees for rates and home values heading into the summer. Stick around. Thanks for sticking with us. Let’s dive right back in. So do you forecast more than a year out or is it kind of like a 12 month flip forward?

Orphe:
We do have a little bit further out, but, uh, but it’s, it’s safe to say that I don’t like talking about a forecast that’s more than a year out. Uh, I think it’s a, it’s a difficult ex exercise as it is, right? And we revise the forecast quite often, uh, so mm-hmm . Uh, depending on how things are changing. In fact, I think that’s best practice, right? To Sure. To make sure you stay on top of current developments and, and to update your

Dave:
Forecast. That is, in my opinion, best practice. And I know some people think it’s a conspiracy. I personally don’t. I just think, you know, it’s hard to get these things right. Data to collection is messy. That’s right. And I would rather have whatever data source update it and tell us what they got wrong than pretend that everything was perfect and not revise the data.

Orphe:
Exactly.

Dave:
Uh, and I know that’s frustrating because everyone wishes we had perfect data in real time all the time. But that’s just not reality and it’s not possible.

Orphe:
That’s right. And, and as an investor, you know, you’d rather be prepared for the worst.

Dave:
Yeah.

Orphe:
Right. And make the right decision with the right data than basically, uh, kind of fool yourself right into thinking that things are gonna go in one way and then be, you know, and be surprised later.

Dave:
So we’ve seen this sort of splitting of the housing market for a little while now, where honestly it’s just going back to normal. ’cause what we saw from, you know, 20 20, 20 23 where everything went up all the time, that’s not normal. That’s just not what happens. There’s always regional differences, but to me the, the, the regional differences just seem really big right now. Yeah. Like we see some of these hot markets in the Midwest growing at or near 10%, some markets are down 5%. Do you think that’s gonna continue?

Orphe:
So yeah, a couple of things to, to consider here. We can see markets that built a lot of housing are a little bit softer, right? So price growth is not increasing as fast and that makes sense. You can, you pay a big increase in supply, of course, big increase in inventory, you know, you’re going to have more competition on the seller side and downward price growth. The other thing though that to take into consideration is, uh, the rises insurance costs, right? Again, when you start to think about longer term mm-hmm . Potential structural changes, then you have to start thinking about or worrying about some of the southeast regions like Florida, Texas, or even Louisiana, where you’re basically seeing large sales decreases compared to last year, despite the big increase in construction that we saw during the pandemic. And so if you’re starting to see less activity in those markets as well as rising insurance rates, you start to wonder a little bit, you know, whether or not the insurance cost and the climate risk is starting to really affect the psyche in those markets.

Dave:
Yeah. It adds up. It’s all comes together, right? You, because in Louisiana I heard that in a, for some large percentage of homeowners, the taxes and insurance are now as much as the principal and interest on their mortgage. Like you’re paying basically twice. And these things have to impact people over time. Like the, it’s not like people are all of a sudden magically making more money because insurance costs have come up. So either they have to pull back spending somewhere else, or housing prices are gonna fall. Uh, and so I don’t think it’s a coincidence that yeah, places where there’s a lot of supply and where these sort of secondary homeownership costs other than just your mortgage are really going up and

Orphe:
Yeah. You

Dave:
Know, Florida’s on top getting hit with all these special assessments in the condo market. You know, there’s a lot of stuff going on in, in that region that are creating these adverse conditions. So it sounds like this is one of the reasons why we just encourage people on the show all the time to really research your own market. Because we can’t tell you every detail of every single market. Like you gotta look at these things for yourself, how insurance is changing, how your taxes are changing. These big trends are gonna tell you. And you really can learn where your market, where your area of interest is gonna fall on the spectrum because the spectrum’s just getting wider. And you need to figure out sort of where you are. And there’s ways to invest, there’s ways to buy in any market, but you kind of have to understand what kind of market you’re operating in and what tactics, what rules should apply to you and how you should proceed from there.
So I think that’s, that’s super important for everyone here to remember. So Orfe, I, you, you mentioned the trade war, and I’d love to talk to you about this because I keep playing this stuff out in my head, like how does this all work out? And I have some theories, but let’s just assume that tariffs stay similar to where they are now, which is a big assumption. We don’t know that. And so let’s just say that we have, you know, at least a 10% baseline tariff across most countries. Countries like China are probably gonna have a higher tariff. There’s gonna be some specialty tariffs. How do you think this plays out for housing in the long run?

Orphe:
Yeah, I mean, we don’t know , we really dunno, right? We do not know.

Dave:
That’s the really honest

Orphe:
Answer. We dunno. We know we have economic theory, right? And to rely on an economic theory says a tariff is a tax, it’s a tax on consumption. And so ultimately it lowers aggregate demand, right? And, uh, nor aggregate demand could potentially mean, uh, you know, suppose businesses are facing these higher costs and uh, they now have to worry about potentially passing on the cost to consumers, but consumers are not sitting on record savings anymore like they were mm-hmm . A couple years ago. And so ultimately if businesses can pass on the cost to consumers, it hits their profit margins. And if it hits their profit margins and they want to protect their profit margins, what do they do? They might actually start laying off some workers. That’s, that’s one mechanism by which this could be, uh, this could happen. In fact, Zillow actually forecast the unemployment rate could increase from the current level at 4.2% to about 4.6% by year’s end.
It’s a small increase and it’s still very low in historical terms, but our, for our latest forecast reflects that. But on the mortgage side, right, lower growth tends to actually depress treasury yields the tre the benchmark 10 year that influences mortgage rates. And so you may get mortgage rates easing a little bit, uh, in fact we expect mortgage rates could ease slightly this year. So those are the two kind of competing forces here, right? Where lower mortgage rates could actually support housing market activity. In fact, you know, I saw interesting statistic, uh, recently that showed that basically, I don’t, I don’t think, think we had 14 recessions since the great depression and real home prices only fell about four times.

Dave:
Yeah. Yeah.

Orphe:
So the housing market’s extremely resilient. Extremely resilient. And again, our base case scenario is, is not for the US economy to go into a recession.

Dave:
Oh, really?

Orphe:
Okay. Uh, we think the still is a bit of a slowdown, but, and recession risk have risen of course, but we should be okay. And, uh, and the housing market is extremely resilient.

Dave:
That’s so totally true. In a lot of ways housing is sort of countercyclical with like the way monetary policy works. Just for everyone listening, you know, when there’s an economic slowdown, traditionally what happens is the fed lowers rates that primarily and almost disproportionately benefits leveraged assets, which is real estate. When you take out debt to use to buy real estate, interest rates going down, if you think about it, probably impacts real estate more than any other industry in the, in the country. You know, it used to be a lot of like manufacturing when people were building factories, but that sort of capital investment just doesn’t happen in the same way as it used to. So like real estate is really the thing that gets benefited. So I, I totally follow the logic. I have this like fear of trade war inflation offsetting a potential decline in mortgage rates. And maybe that means that they might still go down, but maybe not as much. Uh, we haven’t seen that show up in any of the data. So that is just my wonderings at this point.

Orphe:
Trade war inflation. Um, only if businesses are able to pass on the cost of consumers.

Dave:
So, okay. Thank you. Uh, you are a much smarter person than I am and I wanted to ask you this exact question, so please explain

Orphe:
Because consumers are already kind of strapped for cash and you’re not able to pass on the cost to consumers, then well demand falls.

Dave:
Exactly.

Orphe:
Yeah. And the decline in demand could potentially have a de have a negative impact on, on prices. Well, at first it will shrink profit margins second, it will result in layoffs and, you know, a higher unemployment rate, uh, lower aggregate demand could actually, uh, negate any potential price increase.

Dave:
Yeah.

Orphe:
You know, there’s that, well, there’s also the fact that well potentially you get a one-time price level jump as opposed to higher inflation, which is really the price growth, right? Accelerating mm-hmm . The acceleration.

Dave:
Yeah.

Orphe:
And so, yeah, I I’m not sure that I am, uh, in the camp of, uh, we’re gonna see a big rebound in inflation. We may get a little hotter than expected inflation prints, you know Yeah. For a couple months. But then actually the, uh, that should revert pretty quickly.

Dave:
I’ve sort of come out to the same idea that one time price growth is probably likely, and you might see top line prices go up, you know, the sticker price of a new car is probably gonna go up. What people actually wind up paying for that car is, is kind of a different question. That’s right. And that’s kind of what I’ve been thinking is like, that’s right. This, like you said, there isn’t this excess savings right now, and although real wages are going up, it’s not crazy. It’s not like people are super flush right now. And so yeah, there is gonna be upward pressure on pricing and input costs for businesses for sure. That part seems like more certain, but same thing we were talking about with the gap between sellers and buyers in the housing market, if people are just not willing to pay that price, what are they gonna do?
The, the car manufacturers gotta lower the price. They can’t just not sell cars, you know, like they have to move inventory. It’s the same thing with builders, right? Maybe they’ll produce a little bit less that could be, and layoff people, like you were saying, but they still gotta move inventory. And so I think unless things get worse and tariffs go up, you know, and there’s some other shock, I sort of have come out to the same conclusion, we’ll probably see some prints that go up, which is why I’ve been saying repeatedly, I think mortgage rates, the trend is down over like the year or two year term, but like in the next 6, 3, 6 months, I don’t know. It’s a little less certain, but I do think that this like idea that it’s gonna spiral like it did in 20 21, 20 22, there’s no evidence of it yet. And like just trying to read the tea leaves, it feels less likely than I was feeling at least about it like a month ago.

Orphe:
Totally. And, and again, to, to piggyback on what you just said, it’s, uh, remember a few years ago we had, uh, a ton of stimulus

Dave:
Yes.

Orphe:
Uh, the demand side stimulus, right? And so you had the supply shock, but then you also had a ton of demand stimulus, and so that’s what partially caused runaway inflation. And so

Dave:
Mm-hmm .

Orphe:
You know, this is, it’s not, it’s not the case now. You look at inflation market measures of inflation expectations, they’re pretty low. They’re not rising.

Dave:
Yeah.

Orphe:
The labor market is cooling. You have hiring rates are the decade low.

Dave:
Mm-hmm .

Orphe:
Uh, layoffs remain low. That’s good news. Yeah. Uh, but quits are also very low, meaning people are not moving from job to job, uh, negotiating higher pay. And so I really don’t expect to see a prolonged uptick in inflation in the, in the next few months. The latest research on this shows the impact of tariffs under the first presidency. And it was de decline in local employment in parts that were more exposed to the tariffs. And so that is what I

Dave:
Expect, which is deflationary, right? Like lower employment. Interesting. Yeah. The stuff’s so complicated. I know everyone here is probably like, what are these guys talking about? But , it’s, it’s really interesting and I think it’s it’s

Orphe:
Important if you’re making real estate decisions, right? You have to know exactly. Yeah. Uh, where is that demand going to be coming from, right? Mm-hmm. Uh, very, very

Dave:
Important. More from Zillow’s may forecast in just a moment, but first, a quick break. Welcome back to on the Market. I’m Dave Meyer here with Orfe Dung Guy. Let’s get back into the data. You said that your base case is not for a recession, but you’ve been talking about lower employment and weakness. So tell me more about that.

Orphe:
Yeah, I mean, our forecast is a, a is for the unemployment rate to go up from 4.2% to 4.6%. Right? This year, 4.6% is historically low. Still.

Dave:
Yeah. Still pretty good. It’s,

Orphe:
And then if you look at the latest initial claims data, actually it’s kind of ticked down, like it had ticked up a little bit at the end of the April, you know, the weekly data is highly volatile. And so like you look at the four week moving average, and it’s not, you know, it’s increased a little bit

Dave:
Mm-hmm . Right?

Orphe:
And so I am, uh, not that worried yet, let’s put it this way. And, and then again, I’m, I’m the most optimistic member of the economic research team at Zillow. I think

Dave:
Okay. . That’s good to know. That’s good to know. I, I am on the fence. You know, I think I see this data just about like consumer spending, consumer sentiment and like consumer spending’s not really down yet, but you hear these sort of like canaries in the coal mine stuff where these fast food companies or retail companies are like, people aren’t spending, or their ticket levels are going down. And, you know, none of that is hard data. It’s kind of just like anecdotal. But what worries me a little bit is it does seem like the average Americans tighten their belt a little bit and those things can spiral and matter and, and impact businesses who lower their spending. You know, those things can sort of like accelerate. So, uh, that, that’s sort of what worries me a little bit.

Orphe:
Yeah, absolutely. I mean, the bottom line is, if you’re worried about the future, you save a higher share of your income. If businesses are worried about the future, they’re less likely to spend invest, right. Or hire new workers. And so the risk of recession increases because growth is slowing. Right. But growth remains positive. I mean, you know, you look at the GDP print that we got in quarter one in, in the first quarter, the negative print was driven by surge imports. But you know, ultimately domestic sales were actually positive.

Dave:
Mm-hmm

Orphe:
. Up, i, I think 3% or so on a year over year basis or quarter basis. Uh, can’t remember exactly what the number was, but the bottom line is there’s a slowdown underway, but we’re okay. We’re not in contraction territory yet. I don’t think the current data should lead anyone to think that we’re, you know, near a recession or anything like that. We’re seeing a slowing and we should be careful to watch for things. We just had the fed chair come on Wednesday to talk about, you know, the fed’s view and the assessment is that we’re gonna wait and see, right?

Dave:
Mm-hmm .

Orphe:
There are risks out there, but we’re gonna wait and see. And I think he reiterated the fact that the Fed was ready to save the economy should things deteriorate pretty fast, right?

Dave:
Yeah. Okay. Well man, this is gonna be cer certainly pretty interesting. Like I have been saying and thinking that a recession is likely this year. I see there being a slowdown, whether they call it a recession or not, I don’t really know because like, it’s also subjective. I’ve long and encouraged the audience here to not think about the word recession and whether we’re in one or not. And instead pay attention to like what’s actually happening, the things that matter to you, which are like real wage growth, mortgage rates for real estate investors, inflation, unemployment, like those things matter. If the National Bureau of Economic Research decides that we’re in some magical scenario or that they call a recession or not, none of us know that’s not up to us.

Orphe:
It will usually happen so late. Uh, usually we’re coming out of the recession, whether recession is declared .

Dave:
Oh, exactly. Yeah. So it doesn’t even matter. Like it can’t, it doesn’t impact your decisions at all. These individual metrics matter and like that’s

Orphe:
Right.

Dave:
They can impact your investing decisions, which is why getting this information is, is just so very important. But, uh, thank you so much for joining us today, ORFE. This is fun as always, and really always appreciate your insights.

Orphe:
Thank you. Thank you. Thanks for having me, Dave. See you soon.

Dave:
That wraps up our look into Zillow’s May Housing Market Forecast. Big thanks to Orfe for sharing these insights before the official report even goes live. Make sure you all follow on the market wherever you get your podcast. And check us out on YouTube where we share exclusive content and analysis. And if you wanna get extra nerdy with it, make sure to subscribe to our new weekly newsletter where we keep you updated and informed on everything happening in the market today. I’m Dave Meyer, I’ll see you Allall next time.